Form 10-Q TaskUs, Inc. For: Sep 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from_____________to______________
Commission File Number: 001-40482
_______________________
(Exact name of registrant as specified in its charter)
_______________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(888 ) 400-8275
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_______________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | |||||||||||
| x | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 2, 2022, the number of shares outstanding of the registrant’s common stock was as follows: Class A common stock, par value $0.01 per share: 27,542,032 ; Class B convertible common stock, par value $0.01 per share: 70,032,694 .
TASKUS, INC.
Quarterly Report on Form 10-Q
For Quarterly Period Ended September 30, 2022
Table of Contents
| Page No. | ||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve certain known and unknown risks and uncertainties. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates,” "position us" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Our actual results or outcomes may differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Our actual results may differ significantly from any results expressed or implied by any forward-looking statements. A summary of the principal risk factors that might cause our actual results to differ from our forward-looking statements is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition and results of operations. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”) as filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks and uncertainties include, but are not limited to, the following:
•our business is dependent on key clients, and the loss of a key client could have an adverse effect on our business and results of operations;
•our contracts are typically one to three years in length with automatic renewal provisions, but certain contracts may provide for termination at the client's convenience with advance notice and may or may not include penalties or required payments in the event the termination right is exercised. Our clients may terminate contracts before completion or choose not to renew contracts, and our clients may be unable or unwilling to pay for services we performed. A loss of business or non-payment from significant clients could materially affect our results of operations;
•we may fail to cost-effectively acquire new, high-growth clients, which would adversely affect our business, financial condition and results of operations;
•if we provide inadequate service or cause disruptions in our clients’ businesses or fail to comply with the quality standards required by our clients under our agreements, it could result in significant costs to us, the loss of our clients and damage to our corporate reputation;
•global economic and political conditions, especially in the social media and meal delivery and transport industries from which we generate significant revenue, could adversely affect our business, results of operations, financial condition and prospects;
•unauthorized or improper disclosure of personal or other sensitive information, or security breaches and incidents, whether inadvertent or purposeful, including as the result of a cyber-attack, could result in liability and harm our reputation, each of which could adversely affect our business, financial condition, results of operations and prospects;
•content security, including content monitoring and moderation services, is a large portion of our business. The long-term impacts on the mental health and well-being of our employees doing this work are unknown. This work may lead to stress disorders and may create liabilities for us. This work is also subject to significant press and regulatory scrutiny. As a result, we may be subject to negative publicity or liability, or face difficulties retaining and recruiting employees, any of which could have an adverse effect on our reputation, business, financial condition and results of operations;
•our failure to detect and deter criminal or fraudulent activities or other misconduct by our employees, or third parties such as contractors and consultants that may have access to our data, could result in loss of trust from our clients and negative publicity, which would have an adverse effect on our business and results of operations;
•our business is heavily dependent upon our international operations, particularly in the Philippines and India, and any disruption to those operations would adversely affect us;
•our business is subject to a variety of U.S. federal and state, as well as international laws and regulations, including those regarding privacy and data security, and we or our clients may be subject to regulations related to the processing of
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certain types of sensitive and confidential information; any failure to comply with applicable privacy and data security laws and regulations could harm our business, results of operations and financial condition;
•our business depends in part on our capacity to invest in technology as it develops, and substantial increases in the costs of technology and telecommunications services or our inability to attract and retain the necessary technologists could have a material adverse effect on our business, financial condition, results of operations and prospects;
•our results of operations and ability to grow could be materially affected if we cannot adapt our services and solutions to changes in technology and client expectations;
•fluctuations against the U.S. dollar in the local currencies in the countries in which we operate could have a material effect on our results of operations;
•our business depends on a strong brand and corporate reputation, and if we are not able to maintain and enhance our brand, our ability to expand our client base will be impaired and our business and operating results will be adversely affected;
•competitive pricing pressure may reduce our revenue or gross profits and adversely affect our financial results;
•the success of our business depends on our senior management and key employees;
•the ongoing COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, has adversely impacted our business, financial condition and results of operations;
•affiliates of Blackstone Inc. and our Co-Founders Bryce Maddock and Jaspar Weir control us and their interests may conflict with ours or yours in the future;
•the dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our common stock prior to the completion of our June 2021 initial public offering (“IPO”), and it may depress the trading price of our Class A common stock; and
•the market price of shares of our Class A common stock has been, and may continue to be, volatile and may decline regardless of our operating performance, which could cause the value of your investment to decline.
We urge you to carefully consider the foregoing summary together with the risks discussed under “Risk Factors” in the Annual Report and in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website and our social media outlets, such as Facebook, Instagram, LinkedIn, TikTok, YouTube, and Twitter as channels of distribution of Company information. The information we post through these channels may be deemed material. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at ir.taskus.com, its Facebook page at facebook.com/TaskUs/, its Instagram page at instagram.com/taskus/, its LinkedIn page at linkedin.com/company/taskus/, its TikTok page at tiktok.com/@taskusinc, its YouTube account at youtube.com/c/Taskus/, and its Twitter account at twitter.com/taskus. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section of our investor relations website at ir.taskus.com. The contents of our website and social media channels are not, however, a part of this Quarterly Report.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TASKUS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share data)
| Assets | September 30, 2022 | December 31, 2021 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Other receivables | |||||||||||
| Prepaid expenses | |||||||||||
| Income tax receivable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Noncurrent assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred tax assets | |||||||||||
| Intangibles | |||||||||||
| Goodwill | |||||||||||
| Other noncurrent assets | |||||||||||
| Total noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Current portion of debt | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of income tax payable | |||||||||||
| Deferred revenue | |||||||||||
| Deferred rent | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent liabilities: | |||||||||||
| Income tax payable | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred rent | |||||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (See Note 10) | |||||||||||
| Shareholders’ equity: | |||||||||||
Class A common stock, $ | |||||||||||
Class B convertible common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury Stock | ( | ||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Loss (gain) on disposal of assets | ( | ( | |||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Other expense | |||||||||||||||||||||||
| Financing expenses | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Provision for (benefit from) income taxes | ( | ||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
TASKUS, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Retirement benefit reserves | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | $ | ( | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in the initial public offering, net of underwriters' fees and offering costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B convertible common stock | ( | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Distribution of dividends ($ | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
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| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of RSUs | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in acquisition of heloo | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangibles | |||||||||||
| Amortization of debt financing fees | |||||||||||
| Loss (gain) on disposal of assets | ( | ||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Unrealized foreign exchange losses on forward contracts | |||||||||||
| Deferred taxes | ( | ( | |||||||||
| Stock-based compensation expense | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other receivables, prepaid expenses, and other current assets | ( | ( | |||||||||
| Operating lease right-of-use assets | |||||||||||
| Other noncurrent assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Operating lease liabilities and deferred rent | ( | ||||||||||
| Income tax payable | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other noncurrent liabilities | |||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Acquisition, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings, Revolving credit facility | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Payments for debt financing fees | ( | ( | |||||||||
| Proceeds from issuance of common stock, net of underwriters’ fees | |||||||||||
| Proceeds from employee stock plans | |||||||||||
| Payments for offering costs | ( | ||||||||||
| Payments for taxes related to net share settlement | ( | ||||||||||
| Payments for stock repurchases | ( | ||||||||||
| Distribution of dividends | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Organization
TaskUs, Inc. (“TaskUs” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) was formed by investment funds affiliated with Blackstone Inc. (“Blackstone”) as a vehicle for the acquisition of TaskUs Holdings, Inc. (“TaskUs Holdings”) on October 1, 2018 (the “Blackstone Acquisition”). Prior to the Blackstone Acquisition, TaskUs had no operations and TaskUs Holdings operated as a standalone entity. TaskUs, Inc. was incorporated in Delaware in July 2018, and is headquartered in New Braunfels, Texas.
The Company is a provider of outsourced digital services and next-generation customer experience to fast-growing technology companies, helping its clients represent, protect and grow their brands. The Company's global, omni-channel delivery model is focused on providing its clients three key services - Digital Customer Experience, Content Security and Artificial Intelligence (“AI”) Services (formerly known as AI Operations). The Company has designed its platform to enable it to rapidly scale and benefit from its clients’ growth. Through its agile and responsive operational model, the Company delivers services from multiple delivery sites that span globally from the United States, Philippines, and other parts of the world.
The Company’s major service offerings are described in more detail below:
•Digital Customer Experience: Principally consists of omni-channel customer care services primarily delivered through digital (non-voice) channels.
•Content Security: Principally consists of review and disposition of user and advertiser generated content for purposes which include removal or labeling of policy violating, offensive or misleading content.
•AI Services: Principally consists of data labeling, annotation and transcription services performed for the purpose of training and tuning AI algorithms through the process of machine learning.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”), includes a discussion of the significant accounting policies used in the preparation of our consolidated financial statements. Other than the adoption of the new lease accounting standard, and the business combination and treasury stock accounting policies, there have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Annual Report. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2022 and its results of operations, comprehensive income (loss) and shareholders’ equity for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The condensed consolidated balance sheet as of December 31, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
The acquisition of Parsec d.o.o. and Q Experience d.o.o. (collectively, “heloo”) was completed on April 15, 2022; therefore, the Company’s consolidated financial statements only include heloo’s results since April 15, 2022.
(b) Use of Estimates
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currency exchange rate forward contracts; valuation of stock-based compensation; valuation and impairment of intangibles and goodwill and reserves for income tax uncertainties and other contingencies.
As of September 30, 2022, the impact of the novel coronavirus (“COVID-19”) pandemic, including as a result of new strains and variants of the virus and uncertainty regarding vaccines and treatments, continues to unfold. As a result, many of our estimates and assumptions required judgement and carry a higher degree of variability and volatility. We continue to closely monitor the outbreak and the impact on our operations and liquidity. As events continue to evolve and additional information becomes available, our estimates may change materially in the future.
(c) Principles of Consolidation
(d) Concentration Risk
For the three and nine months ended September 30, 2022 and 2021, the following clients represented greater than 10% of the Company’s service revenue:
| Client | Service revenue percentage | |||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| A | % | % | % | % | ||||||||||||||||||||||
| B | Less than 10% | % | Less than 10% | % | ||||||||||||||||||||||
As of September 30, 2022 and December 31, 2021, the following clients represented greater than 10% of the Company’s accounts receivable:
| Accounts receivable percentage | ||||||||||||||
| Client | September 30, 2022 | December 31, 2021 | ||||||||||||
| A | % | % | ||||||||||||
| B | % | % | ||||||||||||
(e) Business Combinations
The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The purchase price of the acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.
During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations.
(f) Leases
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operate the asset throughout the term of the contract without the lessor having the right to change the terms of the contract. If a lease is identified, the Company determines whether it should be classified as an operating or finance lease at commencement.
The Company has various leases for office spaces under operating lease agreements which have a range of expiration dates from to ten years , and often include a renewal option for an additional term.
Our right of use (“ROU”) lease assets represent our right to use an underlying asset for the lease term and may include any advance lease payments made. Our ROU lease liabilities represent our obligation to make lease payments arising from the contractual terms of the lease. ROU lease assets and lease liabilities are recognized at the commencement of the lease and are calculated using the present value of lease payments over the lease term. Typically, lease agreements do not provide sufficient detail to arrive at an implicit interest rate. Therefore, the Company uses its estimated incremental borrowing rates (“IBR”) based on information available at the commencement date of the lease to calculate the present value of the lease payments. In estimating its IBR, the Company considers the credit rating, the lease term, the currency of the lease payments and market rates of comparable collateralized borrowings for similar terms.
(g) Share Repurchases
(h) Recent Accounting Pronouncements
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company has elected to adopt new or revised accounting guidance within the same time period as private companies.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") ASU 2016-02, Leases (Topic 842), which supersedes ASC 840. The Company adopted this standard in the second quarter of 2022, effective as of January 1, 2022, using the modified retrospective method and the effective date as the date of initial application. The Company recorded right-of-use assets of $45.8 million and lease liabilities of $48.5 million, respectively to the consolidated balance sheet. The Company elected the "package of practical expedients," which permits the Company not to reassess under Topic 842 any prior conclusions about lease identification, lease classification and initial direct costs. The Company did not apply the short-term lease exception and will therefore recognize a right-of-use asset and lease liability for all leases. The adoption of the lease standard did not have a material impact on the Company's consolidated statement of operations nor on its consolidated cash flow statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires the company acquiring contract assets and contract liabilities obtained in a business combination to recognize and measure them in accordance with ASC 606, Revenue from Contracts with Customers. At the acquisition date, the company acquiring the business should record related revenue, as if it had originated the contract. Before the update such amounts were recognized by the acquiring company at fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company early adopted ASU 2021-08 as of April 1, 2022. See Note 3, "Business Combination" for additional information and disclosures related to the heloo acquisition.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised standard relates to measurement of credit losses on financial instruments, and requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The guidance replaces the incurred loss model with an expected loss model referred to as current expected credit loss (“CECL”). The CECL model requires us to measure lifetime expected credit losses for financial instruments held at the reporting date using historical experience, current conditions and reasonable supportable forecasts. The guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU will be effective for the Company beginning in fiscal year 2023 with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-13 on the Company’s consolidated financial statements.
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3. Business Combination
On April 15, 2022 (the “Closing Date”), the Company completed the acquisition of 100 % of the equity interests of heloo, a Croatia-based Digital Customer Experience solutions provider to European technology companies supporting 20 languages across seven additional Eastern European countries, including Bosnia, Serbia, and Slovenia. The Company believes this acquisition will be complementary to the Company's growth strategy by expanding its global delivery footprint with a suite of multi-lingual, cost-competitive Digital Customer Experience services.
The acquisition date fair value of the consideration transferred was $35.4 million, consisting of the following:
| (in thousands) | ||||||||
Cash consideration(1) | $ | |||||||
Holdback cash consideration(2) | ||||||||
Equity consideration(3) | ||||||||
| Total consideration | $ | |||||||
| (1) | Represents cash consideration paid to the sellers to complete the acquisition. | ||||
| (2) | Represents consideration, which was retained by the Company as security to satisfy sellers' obligations for potential future contractual claims arising under the terms of the purchase agreement; provided that the amount of the holdback shall not serve as any limitation on the indemnification obligations of the sellers under the purchase agreement. The holdback is payable to the sellers, net of any such claims, | ||||
| (3) | Comprised of | ||||
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition:
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | |||||||
| Intangibles | ||||||||
| Goodwill | ||||||||
| Other assets acquired | ||||||||
| Total assets | ||||||||
| Total liabilities assumed | ||||||||
| Net assets acquired | $ | |||||||
The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (which may be up to twelve months following the acquisition date). The goodwill is derived from anticipated operational synergies and assembled workforce. None of the goodwill recorded is deductible for tax purposes. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of identifiable intangible assets acquired, the fair value of certain tangible assets acquired and liabilities assumed. The Company expects to continue to obtain information for the purpose of determining the fair value of the assets acquired and liabilities assumed on the acquisition date throughout the remainder of the measurement period. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets acquired is fully evaluated by the Company, including but not limited to, the fair value accounting.
The preliminary purchase price allocation includes $11.2 million of acquired identifiable intangible assets, consisting of the following:
| (in thousands, except useful lives) | Estimated Fair Value | Estimated Useful Life in Years | ||||||||||||
| Customer relationships | $ | |||||||||||||
| Trade name | ||||||||||||||
| Total | $ | |||||||||||||
The preliminary fair values of the identifiable intangible assets have been estimated using the Excess Earnings Method. The intangible assets are being amortized over their estimated useful lives on a straight-line basis that reflects the economic benefit of the assets. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future forecasted cash flows of the Company following the acquisition of heloo.
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4. Revenue
Disaggregation of Revenue
The Company's revenues are derived from contracts with customers related to business outsourcing services that it provides. The following table presents the breakdown of the Company’s revenues by service offering:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Digital Customer Experience | $ | $ | $ | $ | |||||||||||||||||||
| Content Security | |||||||||||||||||||||||
| AI Services | |||||||||||||||||||||||
| Service revenue | $ | $ | $ | $ | |||||||||||||||||||
The majority of the Company’s revenues are derived from contracts with customers who are located in the United States. However, the Company delivers its services from geographies outside of the United States. The following table presents the breakdown of the Company’s revenues by geographical location, based on where the services are provided from:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Philippines | $ | $ | $ | $ | |||||||||||||||||||
| United States | |||||||||||||||||||||||
| Rest of World | |||||||||||||||||||||||
| Service revenue | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
Accounts receivable, net of allowance for doubtful accounts includes $81.5 million and $75.5 million of unbilled revenues as of September 30, 2022 and December 31, 2021, respectively.
5. Forward Contracts and Fair Value Measurement
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The following table presents the Company's settled forward contracts and realized and unrealized losses (gains) associated with derivative contracts:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Total notional amount of settled forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Realized losses (gains) from settlement of forward contracts | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Unrealized losses on forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents the Company's outstanding forward contracts:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Total notional amount of outstanding forward contracts | $ | $ | |||||||||
By entering into derivative contracts, the Company is exposed to counterparty credit risk, or the failure of the counterparty to perform under the terms of the derivative contract. For the periods presented, the non-performance risk of the Company and the counterparties did not have a material impact on the fair value of the derivative instruments.
The Company has implemented the fair value accounting standard for those assets and liabilities that are re-measured and reported at fair value at each reporting period. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value based on inputs used, and requires additional disclosures about fair value measurements. This standard applies to fair value measurements already required or permitted by existing standards.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset and include situations where there is little, if any, market activity for the asset.
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
| Fair value measurements using | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Level 1 inputs | Level 2 inputs | Level 3 inputs | Total | Level 1 inputs | Level 2 inputs | Level 3 inputs | Total | |||||||||||||||||||||||||||||||||||||||
| Forward contracts payable | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The Company’s derivatives are carried at fair value using various pricing models that incorporate observable market inputs, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or by the Company.
6. Property and Equipment, net
The components of property and equipment, net as of September 30, 2022 and December 31, 2021 were as follows:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Leasehold improvements | $ | $ | |||||||||
| Technology and computers | |||||||||||
| Furniture and fixtures | |||||||||||
| Construction in process | |||||||||||
| Other property and equipment | |||||||||||
| Property and equipment, gross | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
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The Company’s principal operations are in the Philippines where the majority of property and equipment resides under its wholly owned subsidiaries. The table below presents the Company’s total property and equipment by geographic location as of September 30, 2022 and December 31, 2021:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Philippines | $ | $ | |||||||||
| United States | |||||||||||
| Rest of World | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
7. Goodwill and Intangibles
On April 15, 2022, the Company completed the acquisition of heloo. As a result of the acquisition, the Company recorded approximately $21.6 million of goodwill and $11.2 million of other identifiable intangible assets. See Note 3, “Business Combination” for additional information.
The changes in the carrying amount of goodwill during the period are as follows:
| (in thousands) | |||||
Balance as of December 31, 2021 | $ | ||||
| Acquisition of heloo | |||||
| Foreign currency translation | ( | ||||
Balance as of September 30, 2022 | $ | ||||
The components of intangible assets as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Trade name | ( | ( | ||||||||||||||||||||||||||||||||||||
| Other intangibles | ( | |||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
8. Long-Term Debt
The balances of current and non-current portions of debt consist of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Current | Noncurrent | Total | Current | Noncurrent | Total | |||||||||||||||||||||||||||||
| Term Loan | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Revolver | |||||||||||||||||||||||||||||||||||
| Less: Debt financing fees | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
2019 Credit Agreement
On September 25, 2019, the Company entered into a credit agreement (the “2019 Credit Agreement”) that included a $210.0 million term loan (the “2019 Term Loan Facility”) and a $40.0 million revolving credit facility (the “2019 Revolving Credit Facility” and, together with the Term Loan Facility, the “2019 Credit Facilities”). On April 30, 2021, the Company entered into Amendment No. 1 to its 2019 Credit Agreement with the existing lenders providing for $50.0 million incremental revolving credit commitments on the same terms as our existing revolving credit facility. On September 7, 2022, the Company entered into the 2022 Credit Agreement (as defined below) and the total outstanding debt under the 2019 Credit Facilities of $267.2 million was fully repaid.
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2022 Credit Agreement
On September 7, 2022, the Company entered into a credit agreement (the “2022 Credit Agreement”) with both new and existing lenders which amended and restated the 2019 Credit Agreement. The 2022 Credit Agreement includes a $270.0 million term loan (the "2022 Term Loan Facility") and a $190.0 million revolving credit facility (the "2022 Revolving Credit Facility" and, together with the 2022 Term Loan Facility, the “2022 Credit Facilities”). The proceeds of the 2022 Term Loan Facility were used to repay all borrowings under the 2019 Credit Facilities, to pay related fees and expenses and for general corporate purposes (the "Refinancing"). The Refinancing was accounted for as a debt modification for existing lenders and new debt for new lenders, resulting in debt issuance costs, including amounts allocated from the 2019 Credit Facilities, of $1.9 million associated with the 2022 Term Loan Facility and $1.1 million associated with the undrawn 2022 Revolving Credit Facility. Third party fees of $0.3
The 2022 Term Loan Facility matures on September 7, 2027, and commencing with the fiscal quarter ending December 31, 2022, requires quarterly principal payments of 0.25 % of the original principal amount through September 30, 2023, 0.625 % of the original principal amount through September 30, 2024, 1.25 % of the original principal amount through September 30, 2025, 1.875 % of the original principal amount through September 30, 2026 and 2.50 % of the original principal amount thereafter, with the remaining principal due in a lump sum at the maturity date. Voluntary principal prepayments are permitted.
The 2022 Revolving Credit Facility provides the Company with access to a $15.0 million letter of credit facility and a $15.0 million swing line facility, each of which, to the extent used, reduces borrowing availability under the 2022 Revolving Credit Facility. The 2022 Revolving Credit Facility terminates on September 7, 2027. As of September 30, 2022, we had $190.0 million of borrowing availability under the 2022 Revolving Credit Facility.
Borrowings under the 2022 Credit Agreement, with the exception of swing line borrowings, bear interest, at our option, either at (i) an adjusted Term Secured Overnight Financing Rate ("SOFR rate") plus a margin of 2.25 % per annum, subject to a Term SOFR rate floor of 0.00 % or (ii) an alternative base rate plus a margin of 1.25 % per annum, subject to an alternative base rate floor of 1.00 %. Any borrowings under the swing line will be subject to the base rate. The 2022 Revolving Credit Facility also requires a commitment fee of 0.40 % per annum of undrawn commitments to be paid quarterly in arrears. We have elected to pay interest on borrowings under the 2022 Term Loan Facility based on the SOFR rate. The interest rate in effect for the 2022 Term Loan Facility as of September 30, 2022 was 5.098 % per annum.
The 2022 Credit Agreement contains a financial covenant requiring compliance with a maximum total net leverage ratio and certain other covenants, including, among other things, covenants restricting additional borrowings, investments (including acquisitions) and distributions. We were in compliance with all debt covenants as of September 30, 2022. Substantially all assets of our direct wholly owned subsidiary TU MidCo, Inc., its wholly owned subsidiary, TU BidCo, Inc. and its material wholly owned domestic subsidiaries are pledged as collateral under the 2022 Credit Agreement, subject to certain customary exceptions.
9. Leases
Operating lease costs recorded to cost of services was $3.7 million and $11.4 million for the three and nine months ended September 30, 2022. Operating lease costs recorded to selling, general, and administrative expense were immaterial.
The following table presents the weighted average remaining lease term and weighted average discount rate for the Company's operating leases as of September 30, 2022:
| September 30, 2022 | ||||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | |||||||
The following table presents supplemental cash flow information related to the Company's operating leases:
| (in thousands) | Nine months ended September 30, 2022 | |||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | ||||||||
| ROU assets obtained in exchange for operating lease liabilities | ||||||||
16
The future lease payments on the Company's operating lease liabilities as of September 30, 2022 were as follows:
| (in thousands) | September 30, 2022 | |||||||
| 2022-remainder of year | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | |||||||
| Total lease liabilities | $ | |||||||
10. Commitments and Contingencies
We are subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. Although the outcomes of such matters cannot be predicted with certainty, we believe that resolution of all such pending matters will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition.
On February 23, 2022, a purported class action lawsuit captioned Lozada v. TaskUs, Inc. et al., No. 22-cv-1479-JPC, was filed in the United States District Court for the Southern District of New York against the Company, our Chief Executive Officer, our President, and our Chief Financial Officer. The complaint alleges that the registration statement filed in connection with the Company’s IPO and the Company’s second and third quarter 2021 earnings calls contained materially false and misleading information in violation of the federal securities laws. The complaint seeks unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, as well as equitable relief. We believe that the lawsuit is without merit and intend to defend the lawsuit vigorously. On October 20, 2022, the Court entered an order appointing Humberto Lozada as Lead Plaintiff in the lawsuit. We cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.
11. Stock-Based Compensation
The following table summarizes the stock option and restricted stock unit ("RSU") activity for the nine months ended September 30, 2022:
| Options | RSUs | ||||||||||||||||||||||
| Number of options | Weighted - average exercise price | Number of RSUs | Weighted - average grant date fair value | ||||||||||||||||||||
Outstanding at January 1, 2022 | $ | $ | |||||||||||||||||||||
Granted | $ | $ | |||||||||||||||||||||
| Exercised or released | ( | $ | ( | $ | |||||||||||||||||||
| Forfeited, cancelled or expired | ( | $ | ( | $ | |||||||||||||||||||
Outstanding at September 30, 2022 | $ | $ | |||||||||||||||||||||
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2022 was $11.10 . There were 3,373,417
The following table summarizes the components of stock-based compensation expense recognized for the periods presented:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cost of services | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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12. Income Taxes
In determining its interim provision for income taxes, the Company used an estimated annual effective tax rate, which is based on expected income before taxes, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the period in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.
The Company recorded provision for income taxes of $3.9 million and $1.7 million in the three months ended September 30, 2022 and 2021, respectively. The effective tax rate was 42.1 % and 12.5 % for the three months ended September 30, 2022 and 2021, respectively. Nondeductible earn-out consideration of $4.9 million increased the effective tax rate for the three months ended September 30, 2022 by $1.5 million, or 15.9 %.
The Company recorded provision for (benefit from) income taxes of $12.3 million and $(1.8 ) million in the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was 33.2 % and 2.3 % for the nine months ended September 30, 2022 and 2021, respectively. The difference between the effective tax rates and the 21% federal statutory rate in the nine months ended September 30, 2022 was primarily due to global intangible low-taxed income (“GILTI”) inclusion, tax benefits of income tax holidays in foreign jurisdiction, nondeductible earn-out consideration and nondeductible compensation of officers. The difference between the effective tax rate and the 21% federal statutory rate in the nine months ended September 30, 2021 was primarily due to GILTI inclusion, tax benefits of income tax holidays in foreign jurisdiction, nondeductible transaction costs and nondeductible compensation of officers.
The Company is subject to income tax in the United States federal, state and various foreign jurisdictions. As of September 30, 2022, the tax years 2018 to 2021 are subject to examination by tax authorities.
The Company’s practice and intention are to indefinitely reinvest the earnings of its non-U.S. subsidiaries. Determination of the amount of any unrecognized deferred income tax liability on the temporary difference is not practicable because of the complexities of the hypothetical calculation.
13. Earnings Per Share
The Company has Class A common stock and Class B convertible common stock outstanding. Because the only difference between the two classes of common stock are related to voting, transfer and conversion rights, the Company has not presented earnings per share under the two-class method, as earnings per share are the same for both Class A common stock and Class B convertible common stock.
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The following table summarizes the computation of basic and diluted EPS for the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | $ | ( | ||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding – basic | |||||||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Weighted-average common shares outstanding – diluted | |||||||||||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||
Since the Company was in a net loss position for the nine months ended September 30, 2021, diluted EPS is equal to basic EPS for that period as the inclusion of potential common stock equivalents would have been anti-dilutive. The Company excluded 3,486,107 and 12,309 potential common stock equivalents from the computation of diluted EPS for the three months ended September 30, 2022 and 2021, respectively, and 2,696,701 and 23,607 potential common stock equivalents from the computation of diluted EPS for the nine months ended September 30, 2022 and 2021, respectively, because the effect would have been anti-dilutive. There were 4,657,008 potential common stock equivalents outstanding as of September 30, 2022 with market conditions which were not met at that date, that were excluded from the calculation of diluted EPS. In addition, the Company excluded 5,578,525 potential common stock equivalents from the computation of diluted EPS for the nine months ended September 30, 2021 since the Company was in a net loss position; however, these awards would have been dilutive if the Company was in a net income position.
14. Related Party
Underwriting of Offering
Blackstone Securities Partners L.P., an affiliate of Blackstone, served as underwriter of 1,380,000 of the 15,180,000 shares of Class A common stock sold in the IPO, with underwriting discounts and commissions of $1.265 per share paid by the Company and selling stockholders, with respect to the shares sold by them.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”), the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the Annual Report"), as filed with the Securities and Exchange Commission (the “SEC”) and the information included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. In addition to historical data, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in our forward-looking statements as a result of various factors, including but not limited to those discussed under “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report and under Part I, Item 1A, “Risk Factors” in the Annual Report.
This Quarterly Report includes certain historical consolidated financial and other data for TaskUs, Inc. (“we,” “us,” “our” or the “Company”). The following discussion provides a narrative of our results of operations and financial condition for the three and nine months ended September 30, 2022 and 2021.
Overview
We are a provider of outsourced digital services and next-generation customer experience to fast-growing technology companies, helping our clients represent, protect and grow their brands. Our global, omni-channel delivery model is focused on providing our clients three key services – Digital Customer Experience, Content Security and Artificial Intelligence (“AI”) Services (formerly known as AI Operations). We have designed our platform to enable us to rapidly scale and benefit from our clients’ growth. We believe our ability to deliver “ridiculously good” outsourcing will enable us to continue to grow our client base.
At TaskUs, culture is at the heart of everything we do. Many of the companies operating in the Digital Economy are well-known for their obsession with creating a world-class employee experience. We believe clients choose TaskUs in part because they view our company culture as aligned with their own, which enables us to act as a natural extension of their brands and gives us an advantage in the recruitment of highly engaged frontline teammates who produce better results.
2022 Developments
Acquisition of heloo
On April 15, 2022, we acquired all of the equity interests of Parsec d.o.o. and Q Experience d.o.o. (collectively, "heloo"), a Croatia-based Digital Customer Experience solutions provider to European technology companies supporting 20 languages across seven additional Eastern European countries, including Bosnia, Serbia, and Slovenia. The results of operations of heloo subsequent to the April 15, 2022 acquisition date are included in the accompanying condensed consolidated financial statements. See Note 3, "Business Combination" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Share Repurchase Program
On September 7, 2022, we announced that the board of directors authorized a share repurchase program, pursuant to which we may repurchase up to $100.0 million of our Class A common stock through December 31, 2024. For additional information, see Item 2 of Part II, “Unregistered Sales of Equity Securities and Use of Proceeds” of this Quarterly Report.
Macroeconomic Trends
Macroeconomic factors, including global economic and geopolitical developments, increased inflation rates, interest rate increases, and foreign currency exchange rate changes, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. Due to market uncertainty and potential recession or other economic challenges, many of our customers are shifting their focus from growth to cost reduction. This has resulted in certain customers electing to shift their delivery model in order to reduce pricing, moving work from our onshore locations to our offshore delivery centers or moving to a work-from-home model, or reducing vendor spend across the board. This trend has been accelerated by our clients in the cryptocurrency and equity trading spaces. These factors contributed to a deceleration in our revenue growth rate and an increase in our operating costs. We expect some or all of these factors to continue to impact our operations in the near term; however, we believe that the increased cost focus also creates meaningful opportunities with both new and existing customers.
War in Ukraine
The Russian invasion of Ukraine and resulting sanctions and other measures imposed in response thereto have increased the level of economic and political uncertainty in Eastern Europe and worldwide. We do not have employees, facilities or operations in either Russia or Ukraine; however, the continuation of the conflict or its potential expansion into surrounding geographic areas, could directly impact us, our clients, vendors or subcontractors, which could impact our operations and
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financial performance. We continue to monitor the situation closely to ensure business continuity plans are in place for neighboring countries where we have a presence.
Recent Financial Highlights
For the three months ended September 30, 2022, we recorded service revenue of $232.1 million, a 15.5% increase from $201.1 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, we recorded service revenue of $718.3 million, a 34.5% increase from $533.9 million for the nine months ended September 30, 2021.
Net income for the three months ended September 30, 2022 decreased to $5.4 million from $11.6 million for the three months ended September 30, 2021. This decrease is due primarily to the impact of foreign currency exchange rate forward contracts and rising interest rates, partially offset by the impact of our continued revenue growth. Adjusted Net Income for the three months ended September 30, 2022 increased 9.3% to $35.8 million from $32.8 million for the three months ended September 30, 2021. Adjusted EBITDA for the three months ended September 30, 2022 increased 15.3% to $55.5 million from $48.1 million for the three months ended September 30, 2021.
Net income (loss) for the nine months ended September 30, 2022 increased to $24.7 million from $(77.8) million for the nine months ended September 30, 2021. This increase included expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the IPO of $133.7 million during the nine months ended September 30, 2021 and the impact of our continued revenue growth, partially offset by higher non-cash stock-based compensation expense, which we began recognizing upon the IPO, the impact of foreign currency exchange rate forward contracts and rising interest rates. Adjusted Net Income for the nine months ended September 30, 2022 increased 18.6% to $109.5 million from $92.3 million for the nine months ended September 30, 2021. Adjusted EBITDA for the nine months ended September 30, 2022 increased 25.4% to $165.3 million from $131.8 million for the nine months ended September 30, 2021. Free Cash Flow for the nine months ended September 30, 2022 increased to $78.5 million from $(102.0) million for the nine months ended September 30, 2021.
The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following tables set forth certain historical consolidated financial information for the three months ended September 30, 2022 and 2021:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Service revenue | $ | 232,130 | $ | 201,053 | $ | 31,077 | 15.5 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 134,544 | 112,423 | 22,121 | 19.7 | % | ||||||||||||||||||
| Selling, general, and administrative expense | 62,348 | 60,342 | 2,006 | 3.3 | % | ||||||||||||||||||
| Depreciation | 9,428 | 7,422 | 2,006 | 27.0 | % | ||||||||||||||||||
| Amortization of intangible assets | 5,087 | 4,711 | 376 | 8.0 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | (8) | 26 | (34) | (130.8) | % | ||||||||||||||||||
| Total operating expenses | 211,399 | 184,924 | 26,475 | 14.3 | % | ||||||||||||||||||
| Operating income | 20,731 | 16,129 | 4,602 | 28.5 | % | ||||||||||||||||||
| Other expense | 7,612 | 1,204 | 6,408 | 532.2 | % | ||||||||||||||||||
| Financing expenses | 3,859 | 1,633 | 2,226 | 136.3 | % | ||||||||||||||||||
| Income before income taxes | 9,260 | 13,292 | (4,032) | (30.3) | % | ||||||||||||||||||
| Provision for income taxes | 3,895 | 1,656 | 2,239 | 135.2 | % | ||||||||||||||||||
| Net income | $ | 5,365 | $ | 11,636 | $ | (6,271) | (53.9) | % | |||||||||||||||
Service revenue
Service revenue for the three months ended September 30, 2022 and 2021 was $232.1 million and $201.1 million, respectively. Service revenue for the three months ended September 30, 2022 increased by $31.1 million, or 15.5%, when compared to the three months ended September 30, 2021.
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Service revenue by service offering
The following table presents the breakdown of our service revenue by service offering for each period:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Digital Customer Experience | $ | 151,474 | $ | 125,310 | $ | 26,164 | 20.9 | % | |||||||||||||||
| Content Security | 43,910 | 45,376 | (1,466) | (3.2) | % | ||||||||||||||||||
| AI Services | 36,746 | 30,367 | 6,379 | 21.0 | % | ||||||||||||||||||
| Service revenue | $ | 232,130 | $ | 201,053 | $ | 31,077 | 15.5 | % | |||||||||||||||
The period over period growth in Digital Customer Experience and AI Services contributed 13.0% and 3.2%, respectively, while the decline in Content Security contributed (0.7)%, of the total increase of 15.5% for the three months ended September 30, 2022.
The 20.9% growth in Digital Customer Experience was primarily driven by an increase in volume of services to existing customers in On Demand Travel + Transportation and Entertainment + Gaming and new customers in On Demand Travel + Transportation and Hi-Tech, as well as new customers as a result of the acquisition of heloo, partially offset by a decrease in volumes with existing customers in FinTech and Social Media.
The 21.0% growth in AI Services was primarily driven by an increase in volume of services to existing customers in Social Media and On Demand Travel + Transportation as well as new customers in HealthTech, partially offset by a decrease in volumes with existing customers in Retail + E-Commerce.
The (3.2)% decline in Content Security was primarily driven by a decrease in volume of services to existing customers in Social Media and On Demand Travel + Transportation, partially offset by an increase in volumes with existing customers in Entertainment + Gaming and Retail + E-Commerce, as well as new customers in FinTech.
Service revenue by delivery geography
We deliver our services from multiple locations around the world; however, the majority of our service revenues are derived from contracts that require payment in United States dollars, regardless of whether the clients are located in the United States.
The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided, for each period:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Philippines | $ | 127,507 | $ | 103,837 | $ | 23,670 | 22.8 | % | |||||||||||||||
| United States | 49,040 | 65,866 | (16,826) | (25.5) | % | ||||||||||||||||||
| Rest of World | 55,583 | 31,350 | 24,233 | 77.3 | % | ||||||||||||||||||
| Service revenue | $ | 232,130 | $ | 201,053 | $ | 31,077 | 15.5 | % | |||||||||||||||
Revenue generated from services provided from our delivery sites in the Philippines grew primarily from expansion in all three of our service offerings, including the impact of certain clients electing to shift work from the United States. Digital Customer Experience contributed 11.9% of the total increase primarily driven by customers in On Demand Travel + Transportation, Entertainment + Gaming and Retail + E-Commerce. Content Security contributed 8.5% of the total increase primarily driven by customers in Social Media. AI Services contributed 2.4% of the total increase primarily driven by customers in Social Media, partially offset by decreases with customers in On Demand Travel + Transportation.
Revenue generated from services provided from our delivery sites in the United States declined primarily from reductions in all three of our service offerings. Certain of our customers have elected to shift work from the United States to the Philippines and Rest of World and we expect this shift to continue through the rest of the year as we work to deliver service out of our customers' optimal geography, which allows us to serve them better in the long-term. Content Security contributed 20.3% of the total decrease primarily driven by customers in Social Media, partially offset by increases with customers in FinTech. Digital Customer Experience contributed 4.3% of the total decrease primarily driven by customers in FinTech and Social Media, partially offset by increases with customers in Hi-Tech, On Demand Travel + Transportation and Entertainment + Gaming. AI Services contributed 0.9% of the total decrease primarily driven by customers in Retail + E-Commerce and Social Media, mostly offset by increases with customers in On Demand Travel + Transportation.
Revenue generated from services provided from our delivery sites in the Rest of World grew primarily from expansion in all three of our service offerings, including the impact of certain clients electing to shift work from the United States. Digital
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Customer Experience contributed 53.5% of the total increase primarily driven by new customers as a result of the acquisition of heloo, customers in FinTech, On Demand Travel + Transportation and Entertainment + Gaming. AI Services contributed 14.3% of the total increase primarily driven by customers in Social Media. Content Security contributed 9.5% of the total increase primarily driven by customers in Social Media and Entertainment + Gaming, partially offset by decreases with customers in FinTech and On Demand Travel + Transportation. Growth in the Rest of World was led by India and Europe.
Operating expenses
Cost of services
Cost of services for the three months ended September 30, 2022 and 2021 was $134.5 million and $112.4 million, respectively. Cost of services for the three months ended September 30, 2022 increased by $22.1 million, or 19.7%, when compared to the three months ended September 30, 2021. The increase was primarily driven by higher personnel costs of $17.4 million, related to an increase in headcount to meet the demand in services from our customers. The remaining increase included costs associated with site expansions and investments in software to support revenue growth.
Selling, general, and administrative expense
Selling, general, and administrative expense for the three months ended September 30, 2022 and 2021 was $62.3 million and $60.3 million, respectively. Selling, general, and administrative expense for the three months ended September 30, 2022 increased by $2.0 million, or 3.3%, when compared to the three months ended September 30, 2021. The increase was primarily driven by higher personnel costs of $1.0 million due primarily to increased headcount across functions in support of our growth as well as earn-out consideration recognized as compensation expense, partially offset by a reduction in stock-based compensation expense as awards issued at, and prior to, the IPO began vesting. The remaining increase included investments in software.
Depreciation
Depreciation for the three months ended September 30, 2022 and 2021 was $9.4 million and $7.4 million, respectively. The increase in depreciation is a result of capital expenditures for additional technology and computers, as well as leasehold improvements associated with site expansions to support revenue growth.
Amortization of intangible assets
Amortization of intangible assets for the three months ended September 30, 2022 and 2021 was $5.1 million and $4.7 million, respectively. The increase in amortization is due to the acquisition of heloo on April 15, 2022. See Note 3, "Business Combination" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Other expense
Other expense for the three months ended September 30, 2022 and 2021 was $7.6 million and $1.2 million, respectively. Changes are driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines, offset by economic hedges using foreign currency exchange rate forward contracts. See Part I, Item 3., “Quantitative and Qualitative Disclosures About Market Risk” in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Financing expenses
Financing expense for the three months ended September 30, 2022 and 2021 was $3.9 million and $1.6 million, respectively. Changes in financing expense are primarily driven by the rate of SOFR and LIBOR used to calculate the interest rate of our debt and the additional $32.5 million draw on our Revolving Credit Facility on April 12, 2022 to fund cash payments relating to our acquisition of heloo. See “—Liquidity and Capital Resources—Indebtedness—2019 Credit Agreement” and “—2022 Credit Agreement” for additional discussion.
Provision for income taxes
Provision for income taxes for the three months ended September 30, 2022 and 2021 was $3.9 million and $1.7 million, respectively. The effective tax rate for the three months ended September 30, 2022 and 2021 was 42.1% and 12.5%, respectively. There are certain items included within the provision for income taxes calculation which were directly related to the IPO in 2021 and not expected to recur in future periods, including certain phantom shares bonuses and equity awards made to officers which are not deductible under Section 162(m) of the Internal Revenue Code. Additionally, costs related to the issuance of stock-based compensation and costs related to the acquisition of heloo within the provision for income taxes calculation are adjusted for Non-GAAP purposes. If those costs are removed, the provision for income taxes would have been $6.4 million and $6.3 million and the effective tax rate would have been 20.9% and 19.4% for the three months ended September 30, 2022 and 2021, respectively.
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The effective tax rate in the future will depend upon the proportion of income before provision for income taxes earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate, as well as a number of other factors, including the impact of new legislation.
Comparison of the Nine Months Ended September 30, 2022 and 2021
The following tables set forth certain historical consolidated financial information for the nine months ended September 30, 2022 and 2021:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Service revenue | $ | 718,269 | $ | 533,946 | $ | 184,323 | 34.5 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 419,364 | 304,251 | 115,113 | 37.8 | % | ||||||||||||||||||
| Selling, general, and administrative expense | 195,514 | 269,650 | (74,136) | (27.5) | % | ||||||||||||||||||
| Depreciation | 27,986 | 20,354 | 7,632 | 37.5 | % | ||||||||||||||||||
| Amortization of intangible assets | 14,765 | 14,135 | 630 | 4.5 | |||||||||||||||||||
| Loss (gain) on disposal of assets | (18) | 54 | (72) | (133.3) | % | ||||||||||||||||||
| Total operating expenses | 657,611 | 608,444 | 49,167 | 8.1 | % | ||||||||||||||||||
| Operating income (loss) | 60,658 | (74,498) | 135,156 | (181.4) | % | ||||||||||||||||||
| Other expense | 16,042 | 299 | 15,743 | 5,265.2 | % | ||||||||||||||||||
| Financing expenses | 7,665 | 4,808 | 2,857 | 59.4 | % | ||||||||||||||||||
| Income (loss) before income taxes | 36,951 | (79,605) | 116,556 | (146.4) | % | ||||||||||||||||||
| Provision for (benefit from) income taxes | 12,271 | (1,805) | 14,076 | (779.8) | % | ||||||||||||||||||
| Net income (loss) | $ | 24,680 | $ | (77,800) | $ | 102,480 | (131.7) | % | |||||||||||||||
Service revenue
Service revenue for the nine months ended September 30, 2022 and 2021 was $718.3 million and $533.9 million, respectively. Service revenue for the nine months ended September 30, 2022 increased by $184.3 million, or 34.5%, when compared to the nine months ended September 30, 2021.
Service revenue by service offering
The following table presents the breakdown of our service revenue by service offering for each period:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Digital Customer Experience | $ | 478,625 | $ | 338,587 | $ | 140,038 | 41.4 | % | |||||||||||||||
| Content Security | 136,093 | 124,498 | 11,595 | 9.3 | % | ||||||||||||||||||
| AI Services | 103,551 | 70,861 | 32,690 | 46.1 | % | ||||||||||||||||||
| Service revenue | $ | 718,269 | $ | 533,946 | $ | 184,323 | 34.5 | % | |||||||||||||||
The year over year growth in Digital Customer Experience, AI Services and Content Security contributed 26.2%, 6.1% and 2.2%, respectively, of the total increase of 34.5% for the nine months ended September 30, 2022.
The 41.4% growth in Digital Customer Experience was primarily driven by an increase in volume of services to existing customers in On Demand Travel + Transportation, FinTech, Entertainment + Gaming and HealthTech and new customers in Hi-Tech, as well as new customers as a result of the acquisition of heloo.
The 46.1% growth in AI Services was primarily driven by an increase in volume of services to existing customers in Social Media and On Demand Travel + Transportation.
The 9.3% growth in Content Security was primarily driven by an increase in volume of services to existing customers in Entertainment + Gaming, FinTech and Retail + E-Commerce, partially offset by a decrease in volumes with existing customers in On Demand Travel + Transportation.
Service revenue by delivery geography
We deliver our services from multiple locations around the world; however, the majority of our service revenues are derived from contracts that require payment in United States dollars, regardless of whether the clients are located in the United States.
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The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided, for each period:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Philippines | $ | 371,909 | $ | 284,096 | $ | 87,813 | 30.9 | % | |||||||||||||||
| United States | 202,444 | 175,553 | 26,891 | 15.3 | % | ||||||||||||||||||
| Rest of World | 143,916 | 74,297 | 69,619 | 93.7 | % | ||||||||||||||||||
| Service revenue | $ | 718,269 | $ | 533,946 | $ | 184,323 | 34.5 | % | |||||||||||||||
Revenue generated from services provided from our delivery sites in the Philippines grew primarily from expansion in all three of our service offerings, including the impact of certain clients electing to shift work from the United States. Digital Customer Experience contributed 20.2% of the total increase primarily driven by customers in On Demand Travel + Transportation, FinTech, Entertainment + Gaming and Retail + E-Commerce. Content Security contributed 7.0% of the total increase primarily driven by customers in Social Media and Retail + E-Commerce. AI Services contributed 3.7% of the total increase primarily driven by customers in Social Media, partially offset by customers in On Demand Travel + Transportation.
Revenue generated from services provided from our delivery sites in the United States grew primarily from expansion in two of our service offerings. Certain of our customers have elected to shift work from the United States to the Philippines and Rest of World and we expect this shift to continue through the rest of the year as we work to deliver service out of our customers' optimal geography, which allows us to serve them better in the long-term. Digital Customer Experience contributed 20.1% of the total increase primarily driven by customers in Hi-Tech, FinTech, On Demand Travel + Transportation and HealthTech. AI Services contributed 3.8% of the total increase primarily driven by customers in On Demand Travel + Transportation, partially offset by customers in Retail + E-Commerce and Social Media. These increases were partially offset by an 8.6% decrease contributed by Content Security primarily driven by customers in Social Media, partially offset by customers in FinTech.
Revenue generated from services provided from our delivery sites in the Rest of World grew primarily from expansion in in all three of our service offerings, including the impact of certain clients electing to shift work from the United States. Digital Customer Experience contributed 64.0% of the total increase primarily driven by customers in FinTech, On Demand Travel + Transportation and Entertainment + Gaming, as well as new customers as a result of the acquisition of heloo. AI Services contributed 20.7% of the total increase primarily driven by customers in Social Media, HealthTech and On Demand Travel + Transportation. Content Security contributed 9.0% of the total increase primarily driven by customers in Social Media and Entertainment + Gaming, partially offset by customers in On Demand Travel + Transportation and FinTech. Growth in the Rest of World was led by India, Europe and Latin America.
Operating expenses
Cost of services
Cost of services for the nine months ended September 30, 2022 and 2021 was $419.4 million and $304.3 million, respectively. Cost of services for the nine months ended September 30, 2022 increased by $115.1 million, or 37.8%, when compared to the nine months ended September 30, 2021. The increase was primarily driven by higher personnel costs of $99.2 million related to an increase in headcount to meet the demand in services from our clients. The remaining increase included costs associated with site expansions and investments in software, as well as other costs associated with certain teammates operating on-site.
Selling, general, and administrative expense
Selling, general, and administrative expense for the nine months ended September 30, 2022 and 2021 was $195.5 million and $269.7 million, respectively. Selling, general, and administrative expense for the nine months ended September 30, 2022 decreased by $(74.1) million, or (27.5)%, when compared to the nine months ended September 30, 2021. The decrease was primarily driven by lower personnel costs of $86.1 million due primarily to expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the IPO of $133.7 million, partially offset by higher stock-based compensation expense and increased headcount across functions in support of our growth. The decrease was partially offset by investments in software, as well as costs associated with resuming travel and insurance expense.
Depreciation
Depreciation for the nine months ended September 30, 2022 and 2021 was $28.0 million and $20.4 million, respectively. The increase in depreciation is a result of capital expenditures for additional technology and computers, as well as leasehold improvements associated with site expansions to support revenue growth.
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Amortization of intangible assets
Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 was $14.8 million and $14.1 million, respectively. The increase in amortization is due to the acquisition of heloo on April 15, 2022. See Note 3, "Business Combination" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Other expense
Other expense for the nine months ended September 30, 2022 and 2021 was $16.0 million and $0.3 million, respectively. Changes are driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines, offset by economic hedges using foreign currency exchange rate forward contracts. See Part I, Item 3., “Quantitative and Qualitative Disclosures About Market Risk” in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Financing expenses
Financing expense for the nine months ended September 30, 2022 and 2021 was $7.7 million and $4.8 million, respectively. Changes in financing expense are primarily driven by the rate of SOFR and LIBOR used to calculate the interest rate of our debt and the additional $32.5 million draw on our Revolving Credit Facility on April 12, 2022 to fund cash payments relating to our acquisition of heloo. See “—Liquidity and Capital Resources—Indebtedness—2019 Credit Agreement” and "—2022 Credit Agreement" for additional discussion on the Term Loan Facility.
Provision for (benefit from) income taxes
Provision for (benefit from) income taxes for the nine months ended September 30, 2022 and 2021 was $12.3 million and $(1.8) million, respectively. Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 33.2% and 2.3%, respectively. There are certain items included within the provision for (benefit from) income taxes calculation which were directly related to the IPO in 2021 and not expected to recur in future periods, including certain phantom shares bonuses and equity awards made to officers which are not deductible under Section 162(m) of the Internal Revenue Code. Additionally, costs related to the issuance of stock-based compensation and costs related to the acquisition of heloo within the provision for (benefit from) income taxes calculation are adjusted for Non-GAAP purposes. If those costs are removed, the provision for income taxes would have been $20.1 million and $14.3 million and the effective tax rate would have been 20.8% and 19.0% for the nine months ended September 30, 2022 and 2021, respectively.
Revenue by Top Clients
The table below sets forth the percentage of our total service revenue derived from our largest clients for the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Top ten clients | 56 | % | 61 | % | 58 | % | 63 | % | |||||||||||||||
| Top twenty clients | 70 | % | 76 | % | 72 | % | 76 | % | |||||||||||||||
Our clients are part of the rapidly growing Digital Economy and they rely on our suite of digital solutions to drive their continued success. For our existing clients, we benefit from our ability to grow as they grow and to cross sell new solutions, further deepening our entrenchment.
For the three months ended September 30, 2022 and 2021, we generated 22% and 27%, respectively, of our service revenue from our largest client, and we generated less than 10% and 11%, respectively, of our service revenue from our second largest client. For the nine months ended September 30, 2022 and 2021, we generated 23% and 27%, respectively, of our service revenue from our largest client, and we generated less than 10% and 11%, respectively, of our service revenue from our second largest client.
We continue to identify and target high growth industry verticals and clients. Our strategy is to acquire new clients and further grow with our existing ones in order to achieve meaningful client and revenue diversification over time.
Foreign Currency
As a global company, we face exposure to movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. See Part I, Item 3., “Quantitative and Qualitative
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Disclosures About Market Risk” in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Non-GAAP Financial Measures
We use Adjusted Net Income, Adjusted Earnings Per Share (“EPS”), EBITDA, Adjusted EBITDA, Free Cash Flow and Conversion of Adjusted EBITDA, as key measures to assess the performance of our business.
Each of the measures are not recognized under accounting principles generally accepted in the United States of America ("GAAP") and do not purport to be an alternative to net income or cash flow as a measure of our performance. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under GAAP. Additionally, Adjusted Net Income, Adjusted EPS, EBITDA, and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with profit or loss for the period. Our management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies.
Adjusted Net Income
Adjusted Net Income is a non-GAAP profitability measure that represents net income or loss for the period before the impact of amortization of intangible assets and certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, we excluded from Adjusted Net Income amortization of intangible assets, transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, COVID-19 related expenses, severance costs, natural disaster costs, one-time payments associated with the IPO, stock-based compensation expense and employer payroll tax associated with equity-classified awards and the related effect on income taxes of certain pre-tax adjustments, which include costs that are required to be expensed in accordance with GAAP. Our management believes that the inclusion of supplementary adjustments to net income applied in presenting Adjusted Net Income are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
The following table reconciles net income, the most directly comparable GAAP measure, to Adjusted Net Income for the three months ended September 30, 2022 and 2021:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 5,365 | $ | 11,636 | $ | (6,271) | (53.9) | % | |||||||||||||||
| Amortization of intangible assets | 5,087 | 4,711 | 376 | 8.0 | % | ||||||||||||||||||
Transaction costs(1) | 39 | 488 | (449) | (92.0) | % | ||||||||||||||||||
Earn-out consideration(2) | 3,648 | — | 3,648 | 100.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 7,713 | 1,285 | 6,428 | 500.2 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | (8) | 26 | (34) | (130.8) | % | ||||||||||||||||||
Stock-based compensation expense(4) | 16,430 | 19,243 | (2,813) | (14.6) | % | ||||||||||||||||||
Tax impacts of adjustments(5) | (2,469) | (4,632) | 2,163 | (46.7) | % | ||||||||||||||||||
| Adjusted Net Income | $ | 35,805 | $ | 32,757 | $ | 3,048 | 9.3 | % | |||||||||||||||
Net Income Margin(6) | 2.3 | % | 5.8 | % | |||||||||||||||||||
Adjusted Net Income Margin(6) | 15.4 | % | 16.3 | % | |||||||||||||||||||
| (1) | Represents non-recurring professional service fees related to the acquisition of heloo in 2022 and the preparation for public offerings that have been expensed during the period in 2021. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (5) | Represents tax impacts of adjustments to net income which resulted in a tax benefit during the period. These adjustments include stock-based compensation expense and earn-out consideration after the IPO. | ||||
| (6) | Net Income Margin represents net income divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue. | ||||
The following table reconciles net income (loss), the most directly comparable GAAP measure, to Adjusted Net Income for the nine months ended September 30, 2022 and 2021:
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| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Net income (loss) | $ | 24,680 | $ | (77,800) | $ | 102,480 | (131.7) | % | |||||||||||||||
| Amortization of intangible assets | 14,765 | 14,135 | 630 | 4.5 | % | ||||||||||||||||||
Transaction costs(1) | 588 | 6,249 | (5,661) | (90.6) | % | ||||||||||||||||||
Earn-out consideration(2) | 4,976 | — | 4,976 | 100.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 16,367 | 477 | 15,890 | 3,331.2 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | (18) | 54 | (72) | (133.3) | % | ||||||||||||||||||
COVID-19 related expenses(4) | — | 6,105 | (6,105) | (100.0) | % | ||||||||||||||||||
Severance costs(5) | 821 | — | 821 | 100.0 | % | ||||||||||||||||||
Natural disaster costs(6) | — | 442 | (442) | (100.0) | % | ||||||||||||||||||
Phantom shares bonus(7) | — | 129,362 | (129,362) | (100.0) | % | ||||||||||||||||||
Teammate IPO bonus(8) | — | 4,361 | (4,361) | (100.0) | % | ||||||||||||||||||
Stock-based compensation expense(9) | 55,160 | 25,014 | 30,146 | 120.5 | % | ||||||||||||||||||
Tax impacts of adjustments(10) | (7,827) | (16,072) | 8,245 | (51.3) | % | ||||||||||||||||||
| Adjusted Net Income | $ | 109,512 | $ | 92,327 | $ | 17,185 | 18.6 | % | |||||||||||||||
Net Income (Loss) Margin(11) | 3.4 | % | (14.6) | % | |||||||||||||||||||
Adjusted Net Income Margin(11) | 15.2 | % | 17.3 | % | |||||||||||||||||||
| (1) | Represents non-recurring professional service fees related to the acquisition of heloo in 2022 and the preparation for public offerings that have been expensed during the period in 2021. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents incremental expenses incurred related to the transition to a virtual operating model and incentive and leave pay granted to employees that are directly attributable to the COVID-19 pandemic. | ||||
| (5) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (6) | Represents one-time costs associated with emergency housing, transportation costs and bonuses for our employees in connection with the natural disaster related to the severe winter storm in Texas in February 2021. | ||||
| (7) | Represents expense for one-time, non-recurring payments of $127.5 million to vested phantom shareholders in connection with the completion of the IPO, as well as associated payroll tax and 401(k) contributions. | ||||
| (8) | Represents expense for non-recurring bonus payments to certain employees in connection with the completion of the IPO. | ||||
| (9) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (10) | Represents tax impacts of adjustments to net income (loss) which resulted in a tax benefit during the period, including phantom shares bonus related to the IPO, and stock-based compensation expense and earn-out consideration after the IPO. | ||||
| (11) | Net Income (Loss) Margin represents net income (loss) divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue. | ||||
Adjusted EPS
Adjusted EPS is a non-GAAP profitability measure that represents earnings available to shareholders excluding the impact of certain items that are considered to hinder comparison of the performance of our business on a period-over-period basis or with other businesses. Adjusted EPS is calculated as Adjusted Net Income divided by our diluted weighted-average number of shares outstanding, including the impact of any potentially dilutive common stock equivalents that are anti-dilutive to GAAP net income (loss) per share – diluted (“GAAP diluted EPS”) but dilutive to Adjusted EPS. Our management believes that the inclusion of supplementary adjustments to earnings per share applied in presenting Adjusted EPS are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
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The following table reconciles GAAP diluted EPS, the most directly comparable GAAP measure, to Adjusted EPS for the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| GAAP diluted EPS | $ | 0.05 | $ | 0.11 | $ | 0.24 | $ | (0.83) | |||||||||||||||
Per share adjustments to net income (loss)(1) | 0.30 | 0.19 | 0.82 | 1.81 | |||||||||||||||||||
Per share adjustments for GAAP anti-dilutive shares(2) | — | — | — | (0.05) | |||||||||||||||||||
| Adjusted EPS | $ | 0.35 | $ | 0.30 | $ | 1.06 | $ | 0.93 | |||||||||||||||
| Weighted-average common shares outstanding – diluted | 101,920,413 | 109,426,011 | 103,073,208 | 93,994,896 | |||||||||||||||||||
GAAP anti-dilutive shares(2) | — | — | — | 5,578,525 | |||||||||||||||||||
| Adjusted weighted-average shares outstanding | 101,920,413 | 109,426,011 | 103,073,208 | 99,573,421 | |||||||||||||||||||
| (1) | Reflects the aggregate adjustments made to reconcile net income (loss) to Adjusted Net Income, as noted in the above table, divided by the GAAP diluted weighted-average number of shares outstanding for the relevant period. | ||||
| (2) | Reflects the impact of awards that were anti-dilutive to GAAP diluted EPS since we were in a net loss position, and therefore not included in the calculation, but would be dilutive to Adjusted EPS and are therefore included in the calculation. | ||||
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP profitability measure that represents net income or loss for the period before the impact of the benefit from or provision for income taxes, financing expenses, depreciation, and amortization of intangible assets. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting financing expenses), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).
Adjusted EBITDA is a non-GAAP profitability measure that represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, we excluded from Adjusted EBITDA transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, COVID-19 related expenses, severance costs, natural disaster costs, one-time payments associated with the IPO and stock-based compensation expense and employer payroll tax associated with equity-classified awards, which include costs that are required to be expensed in accordance with GAAP. Our management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the three months ended September 30, 2022 and 2021:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 5,365 | $ | 11,636 | $ | (6,271) | (53.9) | % | |||||||||||||||
| Provision for income taxes | 3,895 | 1,656 | 2,239 | 135.2 | % | ||||||||||||||||||
| Financing expenses | 3,859 | 1,633 | 2,226 | 136.3 | % | ||||||||||||||||||
| Depreciation | 9,428 | 7,422 | 2,006 | 27.0 | % | ||||||||||||||||||
| Amortization of intangible assets | 5,087 | 4,711 | 376 | 8.0 | % | ||||||||||||||||||
| EBITDA | $ | 27,634 | $ | 27,058 | $ | 576 | 2.1 | % | |||||||||||||||
Transaction costs(1) | 39 | 488 | (449) | (92.0) | % | ||||||||||||||||||
Earn-out consideration(2) | 3,648 | — | 3,648 | 100.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 7,713 | 1,285 | 6,428 | 500.2 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | (8) | 26 | (34) | (130.8) | % | ||||||||||||||||||
Stock-based compensation expense(4) | 16,430 | 19,243 | (2,813) | (14.6) | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 55,456 | $ | 48,100 | $ | 7,356 | 15.3 | % | |||||||||||||||
Net Income Margin(5) | 2.3 | % | 5.8 | % | |||||||||||||||||||
Adjusted EBITDA Margin(5) | 23.9 | % | 23.9 | % | |||||||||||||||||||
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| (1) | Represents non-recurring professional service fees related to the acquisition of heloo in 2022 and the preparation for public offerings that have been expensed during the period in 2021. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (5) | Net Income Margin represents net income divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue. | ||||
The following table reconciles net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the nine months ended September 30, 2022 and 2021:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2022 | 2021 | ($) | (%) | |||||||||||||||||||
| Net income (loss) | $ | 24,680 | $ | (77,800) | $ | 102,480 | (131.7) | % | |||||||||||||||
| Provision for (benefit from) income taxes | 12,271 | (1,805) | 14,076 | (779.8) | % | ||||||||||||||||||
| Financing expenses | 7,665 | 4,808 | 2,857 | 59.4 | % | ||||||||||||||||||
| Depreciation | 27,986 | 20,354 | 7,632 | 37.5 | % | ||||||||||||||||||
| Amortization of intangible assets | 14,765 | 14,135 | 630 | 4.5 | % | ||||||||||||||||||
| EBITDA | $ | 87,367 | $ | (40,308) | $ | 127,675 | (316.7) | % | |||||||||||||||
Transaction costs(1) | 588 | 6,249 | (5,661) | (90.6) | % | ||||||||||||||||||
Earn-out consideration(2) | 4,976 | — | 4,976 | 100.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 16,367 | 477 | 15,890 | 3,331.2 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | (18) | 54 | (72) | (133.3) | % | ||||||||||||||||||
COVID-19 related expenses(4) | — | 6,105 | (6,105) | (100.0) | % | ||||||||||||||||||
Severance costs(5) | 821 | — | 821 | 100.0 | % | ||||||||||||||||||
Natural disaster costs(6) | — | 442 | (442) | (100.0) | % | ||||||||||||||||||
Phantom shares bonus(7) | — | 129,362 | (129,362) | (100.0) | % | ||||||||||||||||||
Teammate IPO bonus(8) | — | 4,361 | (4,361) | (100.0) | % | ||||||||||||||||||
Stock-based compensation expense(9) | 55,160 | 25,014 | 30,146 | 120.5 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 165,261 | $ | 131,756 | $ | 33,505 | 25.4 | % | |||||||||||||||
Net Income (Loss) Margin(10) | 3.4 | % | (14.6) | % | |||||||||||||||||||
Adjusted EBITDA Margin(10) | 23.0 | % | 24.7 | % | |||||||||||||||||||
| (1) | Represents non-recurring professional service fees related to the acquisition of heloo in 2022 and the preparation for public offerings that have been expensed during the period in 2021. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents incremental expenses incurred related to the transition to a virtual operating model and incentive and leave pay granted to employees that are directly attributable to the COVID-19 pandemic. | ||||
| (5) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (6) | Represents one-time costs associated with emergency housing, transportation costs and bonuses for our employees in connection with the natural disaster related to the severe winter storm in Texas in February 2021. | ||||
| (7) | Represents expense for one-time, non-recurring payments of $127.5 million to vested phantom shareholders in connection with the completion of the IPO, as well as associated payroll tax and 401(k) contributions. | ||||
| (8) | Represents expense for non-recurring bonus payments to certain employees in connection with the completion of the IPO. | ||||
| (9) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (10) | Net Income (Loss) Margin represents net income (loss) divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue. | ||||
Free Cash Flow
Free Cash Flow is a non-GAAP liquidity measure that represents our ability to generate additional cash from our business operations. Free Cash Flow is calculated as net cash provided by operating activities in the period minus cash used for purchase of property and equipment in the period. Our management believes that the inclusion of this non-GAAP measure, when considered with our GAAP results, provides management and investors with an additional understanding of our ability to generate additional cash for ongoing business operations and other capital deployment.
The following table reconciles net income, the most directly comparable GAAP measure, to Free Cash Flow for the nine months ended September 30, 2022 and 2021:
30
| Nine months ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash provided by operating activities | $ | 114,464 | $ | (63,426) | |||||||
| Purchase of property and equipment | (36,010) | (38,603) | |||||||||
| Free Cash Flow | $ | 78,454 | $ | (102,029) | |||||||
Conversion of Adjusted EBITDA(1) | 47.5 | % | (77.4) | % | |||||||
| (1) | Conversion of Adjusted EBITDA represents Free Cash Flow divided by Adjusted EBITDA. | ||||
Liquidity and Capital Resources
As of September 30, 2022, our principal sources of liquidity were cash and cash equivalents totaling $122.5 million, which were held for working capital purposes, as well as the available balance of our 2022 Credit Facilities, described further below. Historically, we have made investments in supporting the growth of our business, which were enabled in part by our positive cash flows from operations during these periods. We expect to continue to make similar investments in the future.
We have financed our operations primarily through cash received from operations. We believe our existing cash and cash equivalents and our 2022 Credit Facilities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on several factors, including but not limited to our obligation to repay any amounts outstanding under our 2022 Credit Facilities, our revenue growth rate, timing of client billing and collections, the timing of expansion into new geographies, variability in the cost of delivering services in our geographies, the timing and extent of spending on technology innovation, the extent of our sales and marketing activities, and the introduction of new and enhanced service offerings and the continuing market adoption of our platform.
To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. In particular, the evolving COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected.
Potential investments in, or acquisitions of, complementary businesses, applications or technologies, could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations that could cause us to incur withholding taxes on any distributions. Additional funds from financing arrangements may not be available on terms favorable to us or at all.
As market conditions warrant, we and certain of our equity holders, including Blackstone and their respective affiliates, may from time to time seek to purchase our outstanding debt securities or loans, including borrowings under our 2022 Credit Facilities, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including borrowings under our credit facilities. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.
In September 2022, our board of directors approved a share repurchase program of up to $100.0 million of shares of our Class A common stock. During the three months ended September 30, 2022, we repurchased 738,911 shares of our Class A common stock under the share repurchase program for $13.7 million, which we funded principally with available cash. As of September 30, 2022, approximately $86.3 million remained available for share repurchases under our share repurchase program.
Indebtedness
As of September 30, 2022, our total indebtedness, net of debt financing fees was $268.1 million.
2019 Credit Agreement
On September 25, 2019, we entered into a credit agreement (the “2019 Credit Agreement”) that included a $210.0 million term loan (the “2019 Term Loan Facility”) and a $40.0 million revolving credit facility (the “2019 Revolving Credit Facility” and, together with the Term Loan Facility, the “2019 Credit Facilities”). On April 30, 2021, we entered into
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Amendment No. 1 to its 2019 Credit Agreement with the existing lenders providing for $50.0 million incremental revolving credit commitments on the same terms as our existing revolving credit facility. On September 7, 2022, we entered into the 2022 Credit Agreement (as defined below) and the total outstanding debt under the 2019 Credit Facilities of $267.2 million was fully repaid.
2022 Credit Agreement
On September 7, 2022, we entered into a credit agreement (the “2022 Credit Agreement”) with both new and existing lenders which amended and restated the 2019 Credit Agreement. The 2022 Credit Agreement includes a $270.0 million term loan (the "2022 Term Loan Facility") and a $190.0 million revolving credit facility (the "2022 Revolving Credit Facility" and, together with the 2022 Term Loan Facility, the “2022 Credit Facilities”). The proceeds of the 2022 Term Loan Facility were used to repay all borrowings under the 2019 Credit Facilities, to pay related fees and expenses and for general corporate purposes.
The 2022 Term Loan Facility matures on September 7, 2027, and commencing with the fiscal quarter ending December 31, 2022, requires quarterly principal payments of 0.25% of the original principal amount through September 30, 2023, 0.625% of the original principal amount through September 30, 2024, 1.25% of the original principal amount through September 30, 2025, 1.875% of the original principal amount through September 30, 2026 and 2.50% of the original principal amount thereafter, with the remaining principal due in a lump sum at the maturity date. Voluntary principal prepayments are permitted.
The 2022 Revolving Credit Facility provides us with access to a $15.0 million letter of credit facility and a $15.0 million swing line facility, each of which, to the extent used, reduces borrowing availability under the 2022 Revolving Credit Facility. The 2022 Revolving Credit Facility terminates on September 7, 2027. As of September 30, 2022, we had $190.0 million of borrowing availability under the 2022 Revolving Credit Facility.
Borrowings under the 2022 Credit Agreement, with the exception of swing line borrowings, bear interest, at our option, either at (i) an adjusted Term Secured Overnight Financing Rate ("SOFR rate") plus a margin of 2.25% per annum, subject to a Term SOFR rate floor of 0.00% or (ii) an alternative base rate plus a margin of 1.25% per annum, subject to an alternative base rate floor of 1.00%. Any borrowings under the swing line will be subject to the base rate. The 2022 Revolving Credit Facility also requires a commitment fee of 0.40% per annum of undrawn commitments to be paid quarterly in arrears. We have elected to pay interest on borrowings under the 2022 Term Loan Facility based on the SOFR rate. The interest rate in effect for the 2022 Term Loan Facility as of September 30, 2022 was 5.098% per annum.
The 2022 Credit Agreement contains a financial covenant requiring compliance with a maximum total net leverage ratio and certain other covenants, including, among other things, covenants restricting additional borrowings, investments (including acquisitions) and distributions. We were in compliance with all debt covenants as of September 30, 2022. Substantially all assets of our direct wholly owned subsidiary TU MidCo, Inc., its wholly owned subsidiary TU BidCo, Inc. and its material wholly owned domestic subsidiaries are pledged as collateral under the 2022 Credit Agreement, subject to certain customary exceptions.
See Note 8, “Long-Term Debt” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for additional information regarding our debt.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Net cash provided by (used in) operating activities | $ | 114,464 | $ | (63,426) | |||||||
| Net cash used in investing activities | (59,245) | (38,603) | |||||||||
| Net cash provided by financing activities | 12,854 | 62,093 | |||||||||
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2022 was $114.5 million compared to net cash used in operating activities of $63.4 million for the nine months ended September 30, 2021. Net cash provided by operating activities for the nine months ended September 30, 2022 reflects net income of $24.7 million, as well as the add back for non-cash charges totaling $112.7 million, primarily driven by $54.8 million in stock-based compensation expense, $28.0 million of depreciation, $14.8 million of amortization related to intangibles and $13.5 million of unrealized foreign exchange losses on forward contracts. These changes were partially offset by changes in operating assets and liabilities of $22.9 million. Net cash used in operating activities for the nine months ended September 30, 2021 reflects the net loss of $77.8 million, which includes the one-time phantom shares bonuses, as well as changes in operating assets and liabilities of $42.4 million. These
32
changes were partially offset by the add back for non-cash charges totaling $56.8 million, primarily driven by $25.0 million in stock-based compensation expense, $20.4 million of depreciation and $14.1 million of amortization related to intangibles, partially offset by deferred taxes of $9.7 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2022 was $59.2 million compared to net cash used in investing activities of $38.6 million for the nine months ended September 30, 2021. Net cash used in investing activities primarily consisted of investments in technology and computers as well as build-out costs associated with site expansions to support revenue growth. Net cash used in investing activities for the nine months ended September 30, 2022 included the acquisition of heloo, net of cash received.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 was $12.9 million compared to net cash provided by financing activities of $62.1 million for the nine months ended September 30, 2021. Net cash provided by financing activities for the nine months ended September 30, 2022 consisted primarily of proceeds from the 2022 Credit Facilities, borrowings from our 2019 Revolving Credit Facility and proceeds from employee stock plans, partially offset by payments on long-term debt, including the repayment of all outstanding borrowings under the 2019 Credit Facilities, payments to acquire shares under our share repurchase program, payments for taxes related to net share settlement of equity awards and payments for debt financing fees. Net cash provided by financing activities for the nine months ended September 30, 2021 consisted of proceeds from the IPO, net of underwriters' fees, partially offset by distribution of dividends, payments for offering costs and payments on long-term debt.
Critical Accounting Policies and Estimates
Except as described in Note 2, “Summary of Significant Accounting Policies” included in this Quarterly Report in the Notes to Unaudited Condensed Consolidated Financial Statements, there have been no material changes to our critical accounting policies or in the underlying accounting assumptions and estimates used in such policies as reported in our Annual Report.
Recent Accounting Pronouncements
For additional information regarding recent accounting pronouncements adopted and under evaluation, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of financial risks: market risk (includes foreign currency), interest rate risk and credit risk.
Foreign Currency Risk
Our exposure to market risk arises principally from exchange rate risk. Although substantially all of our revenues are denominated in U.S. dollars, a substantial portion of our expenses were incurred and paid in the Philippine peso in the nine months ended September 30, 2022 and 2021. We also incur expenses in U.S. dollars, and currencies of the other countries in which we have operations. The exchange rates among the Philippine peso and the U.S. dollar have changed substantially in recent years and may fluctuate substantially in the future.
The average exchange rate of the Philippine peso against the U.S. dollar increased from 48.88 pesos during the nine months ended September 30, 2021 to 53.56 pesos during the nine months ended September 30, 2022, representing a depreciation of the Philippine peso of 9.6%. Based upon our level of operations during the nine months ended September 30, 2022 and excluding any forward contract arrangements that we had in place during that period, a 10% appreciation/depreciation in the Philippine peso against the U.S. dollar would have increased or decreased our expenses incurred and paid in the Philippine peso by approximately $26.5 million or $21.7 million, respectively, in the nine months ended September 30, 2022.
In order to mitigate our exposure to foreign currency fluctuation risks and minimize the earnings and cash flow volatility associated with forecasted transactions denominated in certain foreign currencies, and economically hedge our intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, we enter into foreign currency forward contracts. These derivatives have not been designated as hedges under ASC Topic 815, Derivatives
33
and Hedging (“ASC 815”). Changes in the fair value of these derivatives are recognized in the consolidated statements of operations and are included in other expense.
For the three and nine months ended September 30, 2022, the realized losses of $4.5 million and $8.0 million, respectively, resulting from the settlement of forward contracts were included within other expense.
For the three and nine months ended September 30, 2022, we had outstanding forward contracts. The forward contract payable resulting from changes in fair value was recorded under accounts payable and accrued liabilities. For the three and nine months ended September 30, 2022, the unrealized losses on the forward contracts of $6.1 million and $13.5 million, respectively, were included within other expense.
These contracts must be settled on the day of maturity or may be canceled subject to the receipts or payments of any gains or losses, respectively, equal to the difference between the contract exchange rate and the market exchange rate on the date of cancellation. We do not enter into foreign currency forward contracts for speculative or trading purposes. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on the settlement of these derivatives are intended to offset revaluation losses and gains on the assets and liabilities being hedged.
Interest Rate Risk
Our exposure to market risk is influenced by the changes in interest rates paid on any outstanding balance on our borrowings, mainly under our 2022 Credit Facilities. All of our borrowings outstanding under the 2022 Credit Facilities as of September 30, 2022 accrue interest at SOFR plus 2.25%. Our total principal balance outstanding as of September 30, 2022 was $270.0 million. Based on the outstanding balances and interest rates under the 2022 Credit Facilities as of September 30, 2022, a hypothetical 10% increase or decrease in SOFR would cause an increase or decrease in interest expense of approximately $0.8 million over the next 12 months.
Credit Risk
As of September 30, 2022, we had accounts receivable, net of allowance for doubtful accounts, of $170.6 million, of which $53.8 million was owed by two of our clients. Collectively, these clients represented approximately 31% of our gross accounts receivable as of September 30, 2022.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, the design and operation of the our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
34
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found under Note 10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report and is incorporated by
reference into this Item 1.
Item 1A. Risk Factors
We are subject to various risks that could have a material adverse impact on our financial position, results of operations or cash flows. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed under “Risk Factors” in the Annual Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our financial position, results of operations or cash flows. There have been no material changes to the risk factors included in the Annual Report. You should carefully consider the risk factors set forth in the Annual Report and the other information set forth elsewhere in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On September 7, 2022, our Board of Directors authorized the commencement of a share repurchase program, which authorizes us to purchase up to $100.0 million of shares of our Class A common stock from time to time through open market purchases, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. Open market repurchases are expected to be structured to occur within the pricing volume requirements of Rule 10b-18. The timing and total amount of stock repurchases will depend upon, business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, restrictions under the terms of our loan agreements and other relevant considerations. The repurchase program terminates on December 31, 2024, and may be modified, suspended or discontinued at any time at our discretion. The program does not obligate the Company to acquire any amount of Class A common stock.
During the three months ended September 30, 2022, purchases of Class A common stock were as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands) | |||||||||||||||||||
July 1, 2022 through July 31, 2022 | — | $ | — | — | $ | — | |||||||||||||||||
August 1, 2022 through August 31, 2022 | — | — | — | — | |||||||||||||||||||
| September 1, 2022 through September 30, 2022 | 738,911 | 18.54 | 738,911 | $ | 86,298 | ||||||||||||||||||
| Total | 738,911 | $ | 18.54 | 738,911 | |||||||||||||||||||
| (1) | Average price paid per share includes costs associated with the repurchases. | ||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
35
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | Amended and Restated Credit Agreement, dated as of September 25, 2019 and as amended and restated on September 7, 2022, among TU MidCo, Inc., TU BidCo, Inc., the guarantors party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent, swing line lender and an L/C issuer, and the lenders and L/C issuers party thereto from time to time. | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1* | |||||
| 32.2* | |||||
| 101.INS | XBRL Instance Document– the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
* Furnished herewith.
†Management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure except for the terms of the agreements or other documents themselves, and you should not rely on them for other than that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and do not apply in any other context or at any time other than the date they were made.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TASKUS, INC. | |||||||||||
| (Registrant) | |||||||||||
| Date: | November 8, 2022 | By: | /s/ Balaji Sekar | ||||||||
| Balaji Sekar | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| (Authorized Signatory) | |||||||||||
| Date: | November 8, 2022 | By: | /s/ Steven Amaya | ||||||||
| Steven Amaya | |||||||||||
| Senior Vice President—Finance | |||||||||||
| (Principal Accounting Officer) | |||||||||||
37
ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
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